More Paine for Insurers of Insolvent Companies: Insurers joined to proceeding in anticipation of directors’ potential bankruptcy

27 May 2022

The liquidators of a company successfully applied to join the insurers of the directors of an insolvent company to court proceedings.

In Issue

As part of a claim against a company’s directors for insolvent trading, it became apparent that should the directors be found liable, they would be unable to pay the damages sought, and would become bankrupt. The liquidator brought an interlocutory application to join the company’s insurers that provided management liability cover in the relevant period, pursuant to of s117 of the Bankruptcy Act 1966 (Cth).

The background

Mr Darrin Paine (Liquidator and first plaintiff) was appointed as liquidator of the second plaintiff, Advanced Fuel Tanks Pty Ltd (Advanced Fuel) on 17 October 2016. Anthony Turner, Grant Slater, and Keith Tann (together, the Directors) were all directors of Advanced Fuel at relevant times. In the proceeding, the plaintiffs alleged that the Directors contravened s588G of the Corporations Act 2001 (Cth) by failing to prevent Advanced Fuels from incurring debts when insolvent (Proceeding).

During the period of 28 February 2016 to 28 February 2017, Advanced Fuel had a ‘Management Liability Insurance Policy’ (Policy) with Hardy (Underwriting Agencies) Limited, Liberty Managing Agency Limited, Arch Underwriting at Lloyd’s Limited, and Asta Managing Agency Limited acting for and on behalf of Everest Syndicate (together, Insurers), which provided management liability cover for the Directors.

On the evidence provided, it was clear that the Directors had no personal capacity to make payment of the amounts claimed in the Proceeding and would become bankrupt if the plaintiffs succeeded in their claims. Accordingly, the plaintiffs made an application pursuant to s117 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) to join the Insurers to the Proceeding, and sought leave to file and serve an amended originating process and second amended statement of claim.

The decision

The Court granted the orders sought.

The Court determined that the operation of the Bankruptcy Act was such, that should (a) the plaintiffs be successful, (b) the Directors become bankrupt, and (c) the plaintiffs establish that the Insurers are able to indemnify the Directors for their liability to Advanced Fuel, then Advanced Fuel would have a right to the proceeds of the Policy in respect of the Directors’ liability.

The Court applied the decision of CGU Insurance Limited v Blakely and Ors (2016) 259 CLR 339 to satisfy itself that it had jurisdiction to make the orders. That is, the plaintiffs’ claim for relief was based under s117 of the Bankruptcy Act and the denial of liability under the Policy was sufficient to “constitute a justifiable controversy” arising under a law of the Commonwealth, being the key element required for the Court to be able to intervene.

Implications for you

This decision reinforces the principles decided in the CGU Insurance case (above), that potential plaintiffs may be able to pursue claims directly against an insolvent company’s insurer under the company’s insurance policy. While insurers’ liability to pay is still contingent on whether the policy responds to the loss, it continues to show that there may be numerous unanticipated potential claims capable of being brought against insurers.

Paine, in the matter of Advanced Fuel Tanks Pty Ltd (in liq) v Turner [2022] FCA 425

Ask us how we can help

Receive our latest news, insights and events
Barry Nilsson acknowledges the traditional owners of the land on which we conduct our business, and pays respect to their Elders past, present and emerging.
Liability limited by a scheme approved under Professional Standards Legislation